Northern Rock Crisis: Old and New Solutions

Paper on the Northern Rock Debacle:

In 2007 Britain experienced its first run on a bank of any macroeconomic significance since 1866.
This was not dealt with by the method that had maintained banking stability for so long: letting the bank fail but supplying abundant liquidity to the markets to prevent contagion. In this paper the authors examine why that traditional solution was not used and propose changes to Britain’s deposit insurance system, to its bank insolvency regime, and in arrangements to allow customers access to banking services should their bank be closed—so that the traditional approach can once more be used to mitigate moral hazard.

Banking Crisis Solutions Old and New by Alistair Milne and Geoffrey Wood, Federal Reserve Bank of St. Louis Review

Comments

[David Martin:]

Thanks for the link.
The reason that normal banking practise was not followed is quite clear though, regardless of how the authors try to dance around it.
This was a political decision, and the area where Northern Rock is based is important to Labour.
Not only were the losses passed on to the taxpayer, but such executives who did leave were given a golden parachute after bankrupting their company, and the remainder continued excessive lending practises.
It is also clear that lies were told by the government ministers on the likely losses, and that gross negligence had occurred by the overseeing authority - the person who had to fall on his sword was again generously compensated.
A position in either government or a bank is, or should not be, an excuse for pillaging the taxpayers money in this way, and all of those responsible should be held to account.
Hopefully the next government will put this in hand, but I doubt it, as it is only the common people who will have to pay for these lies and scams, and those responsible look after their own.

2008 Sep 07 10:06 AM

[ziz:]

It is manifestly clear that the bank was insolvent - for which there are in the UK 2 tests ;

1. Do the bank assets eceed their laibalities ?
2. Can the bank meet it's liabilities as they fall due ?

If the Directors (the only people who can make the decision , who may of course also take advice) consider they are insolvent they ae obliged by Company law to call in an an Insolvency Practitioner.

Loose claims we made by poiticians (including) the Chancellor of the Exchequer that the bank wa solvent - for which they had no ability to determine or position to make a claim.

As such they acted as Shadow Directors and may in fcat have claims made against them by shareholders.

EVidently the best solution in the circumstances, but by no means perfect was the old boys soft shoe shuffle by the bank over the weekend and carry on as if nothing had happened.

Mervyn was no mug and placed the decision fairly and squarely on the plates of PM and Cahncellor (onward and upward) and they fluffed it.

The Germns did it with the Bak in saxony whose name I forget and blow the EU rules. Result - peace of a kind.

2008 Sep 07 03:59 PM